The prospectus-exempt market is a sea of opportunity, one that affords private investors of all wallet sizes a chance to purchase stakes in innovative new disruptors and, most importantly, to do so before these companies become household names. But like any sea, the exempt market is best navigated by a steady hand who always has a client’s best interest in mind. In this case: an exempt market dealer (EMD).
An exempt market dealer is a firm or individual that has been licensed to distribute securities without an accompanying prospectus, the legal document outlining a publically-traded company’s background, executive structure, business operations, and financial outlook. Herein lies an enduring source of the EMD’s value: they are obligated to have a deep understanding of the companies whose exempt market securities they are offering to clients. An EMD’s expertise stems from training and certification standards, and this knowledge is being refreshed on an ongoing basis with every new regulatory prescription or shift in market conditions. Some exempt market dealers are highly specialized, focusing only on specific industries such as real estate, energy, minerals, or technology.
In a sense, an exempt market dealer acts as a stand-in for the more streamlined and exhaustive dataset of a prospectus, and this legal obligation to ‘know their product’ makes them an invaluable resource for investors and companies when navigating the exempt market.
For the most part, an EMD is bound by the same regulatory and licensing standards as other securities dealers, whether in the investment, mutual fund, and scholarship fields. These include a suite of measures meant to protect their clients. Paramount among them is the requirement that every exempt market dealer must ‘know their client’ – what are a client’s investment needs and objectives, and what are their financial constraints. For example, many investment products on the exempt market are more illiquid than their public counterparts, and that could pose a problem for investors who lack a sufficient financial buffer. EMDs are also required to maintain a minimum of $50,000 working capital, take out a range of insurance policies on behalf of their clients, and provide clients with periodic updates on the status of their investments.
Ontario’s regulatory framework casts EMDs as ‘gatekeepers’ situated between the public and exempt market offerings. The designation carries another weighty responsibility: EMDs must also stand guard over the integrity of Canada’s capital markets.
A qualified EMD is essential for individuals and firms looking to invest in the exempt market. Who might that be? Anyone looking to capitalize on the unique opportunities that exempt market offerings represent.
Exempt markets are a way for companies to raise money without embarking on the time-intensive and costly process of preparing a prospectus (think legal accounting, underwriting fees, and ensuring compliance to the rigorous disclosure standards of public companies). The term can also refer to other prospectus-exempt issuances such as debt, asset-backed securities, investment funds, and derivatives.
For an investor, the exempt market offers a range of products, some high-risk high-reward, and that much-sought-after chance to ‘get in at the ground floor’ – a chance that is normally reserved for corporate insiders and large institutional investors. The exempt market also represents an avenue of potential diversification for investors who are already heavily into publically traded (and thus volatile) securities.
For small- and medium-sized companies looking to raise money, the exempt market represents an invaluable source of capital, one whose illiquidity provides fiscal stability during the critical start-up stage of the business cycle.
For a more detailed, in-depth look into the exempt market and exempt market dealers, keep an eye on the blog in the weeks to come.